The Bank of England has reduced its base interest rate in due course from 4% to 3.75%. This historic step is a major step towards relieving the financial strain on borrowers across the country. This decision, made by the Bank’s Monetary Policy Committee (MPC), reflects a growing concern over economic stagnation and aims to provide relief to individuals facing increasing financial challenges.
In testimony before the legislature on February 2, MPC Chair Andrew Bailey and five other MPC members supported the Christmas rate cut. This decision comes as inflation decreased to 3.2% in November. As the MPC moves to ease monetary policy, their majority vote speaks to the changing economic landscape and their task of navigating a changing global economy. The committee’s latest assessment agrees that the UK economy probably flat-lined in the fourth quarter. This has forced them to reconsider their entire philosophy on interest rates.
The ease with which that decision to cut rates was made is notable because it wasn’t without its debate inside the committee. Nearly all economists expect at least one additional cut in the year ahead. Not so fast — at least four members of the MPC called the bottom on rate cuts, and indeed, we might already be there. These kinds of sentiments signal much larger trepidation about finding a good balance between promoting economic growth and pursuing an affinity for inflation.
“We still think rates are on a gradual downward path. But with every cut we make, how much further we go becomes a closer call.” – Andrew Bailey
The City has been betting heavily on a sixth interest rate cut since last August. They are convinced that the only way to accelerate the economic recovery is to lower these rates even further. There are very early signs that the government’s fiscal approach under the leadership of fiscal Conservative Chancellor Rachel Reeves could be throwing a monkey wrench into things. To this end, the Chancellor has recently announced a package of relief on energy bills, rail fares, and prescription charges. The overall effect of these measures is to reduce headline inflation by 2026.
Interestingly, the MPC doesn’t mention this, but they suggest that government interventions could exacerbate price increases. Wondering how the joint infrastructure and budget reconciliation bills might affect your state’s infrastructure funding? Our forecast of below-trend growth and fading inflation means the near-term call remains conducive to cuts. Fears of durable inflation still loom large over monetary policy deliberations.
The recent moves by the Bank of England show a distinct desire to tread carefully as it faces a tricky economic tightrope. The committee remains focused on trends in currently observed inflation and the state of the real economy. They know the careful balance they must strike between promoting growth and not letting growth trigger inflationary pressures.